SEC Buries the Lede About Stunning Misconduct in Its Office of the Ombudsman

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Office of Inspector General

August 29, 2022 

Investigative Summary 

Findings Related to the Former SEC Ombudsman 

The U.S. Securities and Exchange Commission (SEC) Office of Inspector General (OIG) investigated anonymous allegations that the former SEC Ombudsman provided false statements to OIG auditors regarding the SEC's Tips, Complaints, and Referral (TCR) program, and that the former Ombudsman violated SEC Regulation (SECR) 3-2 (TCR Intake Policy) by failing to enter TCRs in accordance with SEC policy. 

We found that the former Ombudsman misrepresented facts in a written response to an OIG draft management letter related to TCR practices by the Office of the Ombudsman. The former Ombudsman's written response to the OIG letter was in direct contravention to what the former Ombudsman conveyed to the OIG during its engagement with the former Ombudsman on the TCR program, what we confirmed through TCR records, and what we learned from the Office of the Ombudsman's staff. Additionally, the former Ombudsman approved a spreadsheet provided to the OIG containing fourteen TCR entries that were purportedly entered by staff within the Office of the Ombudsman, which was inaccurate and misleading. We found that ten of the fourteen TCRs presented in the spreadsheet did not originate within the Office of the Ombudsman, were not related to Ombudsman matters, nor were they entered into the TCR system by Office of the Ombudsman staff. 

We also found that the former Ombudsman violated SECR 3-2 by failing to enter TCRs on investor matters received by the Office of the Ombudsman that warranted entry. Moreover, the former Ombudsman directed staff within the Office of the Ombudsman to refer investors to enter their own TCRs on matters related to alleged securities law violations or fraud, rather than entering the matters into the TCR system or forwarding the matters to a TCR point of contact, as SECR 3-2 requires. 

The SEC official charged with helping the public navigate the agency's complex system lied to investigators, added misleading information in reports to Congress, and didn't log hundreds of entries into the agency's tip program, according to the summary of an inspector general's report.

The government investigation into Hoecker was led from 2017 to 2019 by the Integrity Committee, a federal panel that examines allegations of wrongdoing against inspectors general, after two whistleblowers alleged that he conducted a substandard investigation. Inspectors general are government watchdogs who guard against the misuse of taxpayer dollars.

The previously unreported documents show that the SEC, which received the Integrity Committee's report on Hoecker in 2019, also concluded wrongdoing by Hoecker. He failed "to avoid the appearance of" bias and exercised "poor judgment when contacting a witness during an active investigation."

The SEC concluded that Hoecker failed "to report allegations of improper conduct pursuant to the SEC's policy of preventing harassment," according to the documents, which include Hoecker's time-sheets.

While the Integrity Committee recommended the SEC consider firing Hoecker, its Commissioners voted instead on May 8 to suspend him without pay from May 24-June 2, 2020, the records show. At the time, Hoecker earned nearly $277,000 a year.

[I]n November 2014, I filed a complaint with the SEC's Officer of Inspector General ("OIG") and requested an investigation of what I deemed OWB's dilatory conduct. In submitting my complaint, I was required to participate in a substantial telephone interview by the third-party service provider that the SEC retains for such purposes. During that interview, I provided the sum and substance of my complaint. I then awaited some meaningful follow-up. And I waited. And I still wait.

In my futile attempts to communicate with OIG, I have referenced the April 9th BrokeAndBroker.com Blog article, which details my exasperation with both OWB and OIG. In response, OIG referred me back to OWB! Additionally, OIG persists in asking me to provide information that I had previously submitted -- but OIG will not acknowledge that it has either misplaced or lost that information and I will not cooperate further without such an admission or explanation to the contrary. Ten months have passed since the filing of my complaint with OIG and there has be no effort to contact me to discuss my concerns.

Keep in mind that my client was finally awarded about $1.6 million after the publication of the April 9th BrokeAndBroker.com Blog. It's one thing to write me off as disgruntled because my client's claim was denied but it's quite another thing when you're trying to marginalize the grievances of someone who provided substantial assistance to the SEC and eventually gained a sizable award. The system is broken and needs to be fixed.

As part of my law practice, I represent whistleblowers, and for several years, I have been representing one such client before the Securities and Exchange Commission ("SEC") and dealing with the federal regulator's Office of the Whistleblower ("OWB"). Frankly, the experience has been incredibly frustrating. I simply cannot persuade the OWB that it needs to adjust its mind-set and understand that my client is not an adversary or a defendant/respondent in a criminal/regulatory case. If OWB's attitude doesn't change, it will undermine the SEC's Whistleblower Program and dissuade informants from coming forward and deter lawyers from representing those individuals on a contingency basis.

As a former regulator with two Wall Street self-regulatory organizations, I fully understand and respect the need for prosecutors and regulators to scrupulously maintain whatever confidentiality is mandated for investigations and trials/hearings. Since I represent individuals and entities that are often industry defendants/respondents and I also represent defrauded public customers, I am particularly vested in ensuring that the regulatory and criminal justice processes remain legal and ethical. I understand the rules of the game and I honor the rulebook. It is in that spirit that I urge the SEC to implement more deadlines within its Rule 21F. Also, I urge the SEC to investigate its Office of the Inspector General ("OIG") and determine whether the use of third-party service providers is appropriate for the intake of complaints directed to that office.

The OIG uses a curious process for the intake of complaints about the SEC and its divisions and staff. You can utilize an online filings system or a toll-free hotline telephone number. Apparently both are serviced by third-party service provider. I opted to file my grievance via telephone.  The telephone call in November 2014 was protracted, during which time I was asked a series of questions (likely from a script) and, in response, I provided names, dates, rules, and events in support of my complaint.  I know that OIG got the complaint because they provided me with a Report number and sent to me this email on November 20, 2014: . . .

. . .

Despite having cooperated fully with the intake procedures that OIG has implemented, it seems that OIG either lost, destroyed, or misplaced the notes of my November 2014 complaint. Inexplicably, in response to complaints about OWB's policies and practices, OIG waited four months before referring me back to OWB. . . .

While the Division is doing more with less, we do need more resources. For example, more cases are being litigated and going to trial. The SEC has tried the same number of cases to verdict in federal courts in FY22 (14) as we did in the prior three fiscal years combined.

Further, in FY21, we received 46,000 tips, complaints, and referrals from members of the public, up from about 16,000 five years earlier.

Don't Go There: For those of you who want to argue that I'm politically biased against Chair Gensler or have some grudge against him, please recall my remarks as published in the February 12, 2021, "Securities Industry Commentator," 
https://www.rrbdlaw.com/5687/securities-industry-commentator/, where I stated, in part, that:

Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers (SEC Release)

As BrokeAndBroker.com and Securities Industry Commentator readers know, I detest the SEC's unprincipled history of sanctioning corporate fraudsters in one breath, and then, in the next breath, granting them exemptions from "Bad Boy" provisions. In recent months, when asked about who I would like to see installed as the next SEC Chair, my list of candidates tended to include Preet Bharara, Gary Gensler, and Kara Stein. As such, I welcomed Gensler's selection. That being said, former SEC Commissioner Kara Stein would have been a wonderful choice because of her staunch opposition to the SEC's policy of granting knee-jerk-like exemptions to a slew of corporate miscreants . . .

• SEC
• OWB
• OIG
• Ombudsman
• TCR
• Form TCR
• Hoecker
• Gensler
• BrokeAndBroker
• Bill Singer